When it comes to energy risk management analytics, the classic dilemma that most energy companies face is “build or buy”. A dilemma is a situation in which a difficult choice must be made between two equally undesirable alternatives. Later I will introduce the new alternative of assembling a risk solution. First, let’s spend a moment describing how most energy companies get themselves into the build versus buy dilemma.
A typical risk management life-cycle might look like this: A young energy company (let’s call them Big Energy) operates with a financial spreadsheet that forecasts revenue, costs and margin. At some point, this simple view proves insufficient. So Big Energy hires a risk analyst and/or quantitative modeler to calculate exposure under various scenarios. The risk analyst creates new tools and happily describes these creations to his/her colleagues. Soon Big Energy has dozens of independent analytic tools, often in spreadsheets. For the risk analyst, this is a lot of fun! It’s so much fun that they might not want to openly describe the deficiencies in those analytic tools. We all know what comes next….
At some point, Big Energy experiences a large unforeseen financial loss and senior management realizes their mistake. Their risk analyst was not able to calculate or mitigate the portfolio risk from simple in-house models. So, Big Energy hires a new senior risk manager who promptly puts out an RFP for Energy Risk Management Software. All the big-name risk vendors apply as well as consultants that act as system selectors and system integrators. Of course, the consultants are in bed with the big software vendors. If you pick any of the big system selectors, they will funnel your business to their favorite (massively difficult to install) risk software company. That is the way the game is played.
Big Energy spends 12-18 months picking a system integrator and energy risk management software vendor. They are about to buy, install and maintain an enterprise risk management solution. Based almost entirely on their ability to spend money, Big Energy is now facing a $2M-$10M expenditure over several years. Very typically, they will only receive 60%-80% of the functionality they requested. To fill these gaps, the company continues to buy new services from the software vendor. Big Energy has no choice; they are essentially stuck.
Like a drunk on a bender, the risk management software vendor happily spends Big Energy’s money until they are cut off. Eventually, Big Energy does just this, but they still have only received a portion of the functionality they need. What happens now? Big Energy’s staff will continue to build solutions outside their risk management software, and new processes will be created to manage multiple independent analytic tools, again.
Raise your hand if you know what I am talking about. In which stage of this cycle do you find yourself?
In the energy industry, build or buy are equally undesirable choices. What if you could access risk models on-demand, with no deployment projects, upgrades or long-term commitments?
At cQuant.io, we allow our customers to access sophisticated energy models, on demand. Based on the requirements of each energy portfolio, customers assemble component models into proprietary analytic chains creating a solution just for them. Energy companies can also access our team of PhD quants to quickly build new analytic models at a fraction of the cost of hiring their own quants.
Energy Risk Management Software Done Right
Nobody likes a dilemma. The choice to build or buy is a trap on both sides. In this dilemma, energy companies must decide to either go into the software business (build) or bet the farm (buy) on a single software vendor. cQuant.io is offering a 3rd choice – assemble and start using your risk solution at cQuant.io today.
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